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Notes To Consolidated Financial Statements
104
Unum
2010
When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in
suitable circumstances, provide a more appropriate fair value. During 2010, we have applied valuation techniques on a consistent basis to
similar assets and liabilities and consistent with those techniques used at year end 2009.
We use observable and unobservable inputs in measuring the fair value of our financial instruments. Inputs that may be used include
the following:
• Broker market maker prices and price levels
• Trade Reporting and Compliance Engine (TRACE) pricing
• Prices obtained from external pricing services
• Benchmark yields (Treasury and interest rate swap curves)
• Transactional data for new issuance and secondary trades
• Security cash ows and structures
• Recent issuance/supply
• Sector and issuer level spreads
• Security credit ratings/maturity/capital structure/optionality
• Corporate actions
• Underlying collateral
• Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning
• Public covenants
• Comparative bond analysis
• Derivative spreads
• Relevant reports issued by analysts and rating agencies
• Audited nancial statements
We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a
security’s price. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing
sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our
knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an
adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial
instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity.
Additionally, an adjustment to the price derived from a model typically reects our judgment of the inputs that other participants in the
market for the financial instrument being measured at fair value would consider in pricing that same financial instrument.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market
conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to
inputs in valuations are not changes to valuation methodologies; rather, the inputs are modied to reect direct or indirect impacts on asset
classes from changes in market conditions.
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or
pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the
last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank
Offered Rate (LIBOR) setting syndicate in determining the effect of credit risk on our derivatives’ fair values. If counterparty credit risk for
a derivative asset is determined to be material and is not adequately reected in the LIBOR-based fair value obtained from our pricing
sources, we adjust the valuations obtained from our pricing sources. In regard to our own credit risk component, we adjust the valuation of
derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from
pricing sources does not effectively include an adequate credit component for our own credit risk.